1. Student Economics Forum 2011
CCI/ETAWA
Student Economics Forum 2011
Preparing for the
WACE Stage 3 Exam
Steven Kemp
School of Economics
Curtin University

2. Economics 2011
You need to . . .
Know the Syllabus in 3A and 3B – textbook theory and concepts account for around 60 – 80% of the paper
Use models in your answers
Be aware of current economic conditions & events – around 20 – 30% of the paper
Remember that the exam paper was written before July

3. 3A: International Economics
Global Markets
Patterns & trends in world trade
International competitiveness
Globalisation
Free Trade & Protection
Comparative advantage
Demonstrate the gains from trade
Types of protection (tariffs & subsidies)
Arguments for protection & trade liberalisation
Trade agreements

4. 3A: International Economics
Pattern of Australia’s trade
The terms of trade
The balance of payments
The exchange rate
Foreign liabilities
Foreign debt
Foreign investment

5. Australia’s Exports
Source: Bankwest Economic Snapshot

6. 3B – Macroeconomic Theory
Macroeconomics is about 2 things
Explaining long term economic growth
Explaining short run fluctuations in economic activity – the business cycle

7. Australia

8. Australia
What caused the large fall in the March quarter 2011?

9. 3B – Macroeconomic Theory
You must learn 2 models!
The AE model
Macroeconomic equilibrium
The multiplier
The AD/AS model
Aggregate demand curve
Aggregate supply curve
Use the AD/AS model to explain the business cycle, inflation, unemployment . . .

10. 3B – Macroeconomic Policy
Key macroeconomic objectives
Sustainable rate of economic growth
Full employment/Natural rate of unemployment
Price stability

11. 3B – Macroeconomic Policy
Fiscal Policy
Budget Outcomes
Automatic vs discretionary
Expansionary/contractionary
Impact (use AD/AS model)
Strengths/weaknesses
Recent Budget

12. 3B – Macroeconomic Policy
Monetary Policy
The cash rate
Transmission mechanism
Expansionary/ neutral/ contractionary
Impact (use AD/AS model)
Strengths/weaknesses
Recent interest rate changes?

13. 3B – Macroeconomic Policy
Microeconomic Reform
Examples
Productivity
Economic efficiency
Impact (use AD/AS model)
Strengths/weaknesses

14. Current Macroeconomic Performance and Policy Stance

15. World Growth
Source: RBA

16. Australia - GDP Growth Quarterly % Annual % -1.2 1.0 0.8 2.7 0.0 2.5
March 2011
-1.2
1.0
Dec 2010
0.8
2.7
Sept 2010
0.0
2.5
June 2010
1.4
3.2

17. Inflation CPI Excl Volatile Weight. Median Trimmed Mean 3.6 2.5 2.7
June qrt
0.9
0.5
June 2011
3.6
2.5
2.7
Mar 2011
3.3
2.6
2.2
2.3
Dec 2010
Sept 2010
2.8
3.0
2.4

18. Unemployment 4.9 5.1 5.2 Trend Un Rate % June 2011 Mar 2011 Dec 2010
Sept 2010
5.2
June 2010

19. Exchange Rate

20. Balance of Payments

21. Budget Balance

22. Change in Cash Rate - % points
Monetary Policy
Date
Change in Cash Rate - % points
New Cash Rate Target %
3 Nov 2010
+0.25
4.75
5 May 2010
4.50
7 Apr 2010
4.25
3 Mar 2010
4.00
2 Dec 2009
3.75
4 Nov 2009
3.50
7 Oct 2009
3.25
8 Apr 2009
-0.25
3.00

23. Last Year’s Exam
The exam highlighted certain areas of the syllabus that are not well understood:
The terms of trade
Automatic stabilisers in fiscal policy
The link between the current account and the financial account in the balance of payments
The aggregate demand/aggregate supply model

24. Every Year’s Exam Common Errors
Poor understanding & application of basic models
Agg Expenditure (45o model)
Agg Demand & Agg Supply
foreign exchange market – D($A)/S($A)
Confusion over the CAD, foreign debt, foreign investment

25. Section 1
13. The graph has a marginal propensity to consume of _______ and, therefore, a multiplier of ________. (a) 0.6, 2.5 (b) 0.6, 1.67 (c) 0.8, 5 (d) 0.8, 2.5

26. Section 1
A worsening current account deficit is most likely to be a result of
(a) a decrease in economic growth.
(b) capital expansion in domestic manufacturing plants.
(c) a positive gap between domestic savings and domestic investment.
(d) an increase in exports. 

27. Section 1 An increase in aggregate demand is likely to result in
(a) higher prices and slower growth in real GDP.
(b) higher real GDP and higher interest rates.
(c) lower interest rates and higher inflation.
(d) higher inflation and job creation.

28. Section 1
Which one of the following is an example of discretionary fiscal policy?
(a) a reduction in marginal income tax rates
(b) an increase in tax collections during a boom
(c) an increase in government tariff revenue
(d) a decrease in government tax revenue

29. Section 1
23. Which one of the following statements about productivity is correct? 
(a) Productivity growth always results from capital investment.
(b) Labour productivity is the best measure of productivity growth.
(c) Productivity growth is measured by increases in the output of the economy.
(d) Productivity growth results from capital deepening.

30. Section 2 Q 25 The Terms of Trade
Most students can define the terms of trade, but after that its good night!
The increase in Australia’s terms of trade
Why?
The effects on economic activity, B of P & the $A

32. Section 3
29. Consider each of the following events: (i) an increase in world oil prices; (ii) a depreciation of the Australian dollar. (a) With the aid of separate AD/AS diagrams, explain the likely effects of each event on the Australian economy. (10 marks) (b) Discuss the possible macroeconomic policy options available to the Australian Government to combat any negative effects of an increase in world oil prices. (10 marks)

33. Section 3 29. Consider each of the following events:
(i) an increase in world oil prices;
(ii) a depreciation of the Australian dollar.
With the aid of separate AD/AS diagrams, explain the likely effects of each event on the Australian economy. (10 marks)
An increase in world oil prices would . . .
A depreciation of $A would . . .

34. Section 3
29. (b) Discuss the possible macroeconomic policy options available to the Australian Government to combat any negative effects of an increase in world oil prices. (10 marks) What should the government do?

35. Australian Economy
Be aware of the state of the economy – key developments & trends
Key indicators
GDP
Unemployment
Inflation $A
CAD
Cash rate
Budget deficit

36. 2011 – Key Developments?